Are you in the process of buying a home, or are you a homeowner looking to upgrade or refinance? This beginner’s guide to mortgages and 2021 housing market predictions will help you get the best rates!
Mortgages can be overwhelming. The market is saturated with fancy finance terms and predatory lenders who are out to make a buck.
I have a rule. It is a rule adopted by many in the finance world, and it is that I do not spend money on things I do not understand.
This applies to investments, banks, and yes, loans. Let’s seek to understand mortgage loans before signing any paperwork!
What is a Mortgage?
A mortgage is a type of loan. It allows you to buy or refinance a home without having all of the money upfront.
There are different types of mortgages and some terminology that you should be familiar with when looking at mortgages. I’ll cover a few of these key terms below.
What is a Down Payment?
This is the money that you put upfront for your home. The mortgage covers what is left.
A 20% down payment is the universally accepted amount. You can put less “down” on a house (which means you are paying less right now), but your interest rates will be negatively affected.
Putting a larger percent down is a great idea if possible but is sometimes not feasible. Oftentimes people will calculate the down payment based on the house they want.
Instead, I suggest calculating the down payment you can afford and then proceed with house-hunting after you know this number. The Consumer Finance Protection Bureau has this helpful tool to guide you through down payments.
What is Amortization?
This term is used in any principal versus interest conversation. A mortgage is a type of loan, so there is interest involved. Each month, as part of your monthly payment, you pay part of the interest and part of the principal (or the original amount of the loan).
For example, if your monthly payment is $800, not all of the $800 goes toward your $300,000 loan balance. Part of it is interest on that amount.
Amortization looks at how that balance of principal versus interest changes throughout the life of the loan. In the earlier years, a higher percentage will go to interest and will eventually shift to larger percentages towards the principal amount.
Simply put, it is the process of paying the loan as the interest payments get smaller.
What is escrow?
There are more fees in owning a home than just your mortgage. Some of those include property taxes and homeowners insurance.
In order to ensure these are paid, your lender may set up a separate account, called an escrow account, for these expenses.
To get a better idea of the monthly ownership cost of a home, check out this easy-to-use mortgage calculator. It takes HOA fees and maintenance fees into consideration to get a more accurate image of what you will be paying each month. Mortgage Calculators also gives great, clear explanations of all of these expenses.
How do I pick a mortgage lender?
There are plenty of banks, lenders, and mortgage companies that want you to sign with them. Googling “mortgage lenders” will get you over 500 million responses!
Knowing this, you should shop around for a lender. Do some research about different companies and explore your options. Gather quotes from different lenders and choose which rates make the most sense for your financial situation.
Also, take into consideration current customer reviews and reviews of ex-customers. Find out why customers like or dislike this lender. There is more to a lender than just their rate.
Remember that almost everyone has a mortgage or has had one in the past. Talk to your parents, friends, and colleagues to gather information about the market where you live!
Now that we have some terminology under our belt, here are some tips to consider while shopping around for lenders.
How to Get the Best Mortgage Rates
- Increase your credit score! Your credit score will be one of the first things a lender checks. For more information about credit scores, read Madison’s post about what can increase or decrease your score! On average, lenders like a score of 720 or above. There are 3 major credit bureaus and EACH is required to give you one FREE copy of your credit report each year. Ensure there are no mistakes on your report and use your good score as leverage to lower your interest rate!
- Lower your debt-to-income ratio. This ratio is a simple calculation to see how much debt you carry compared to how much income you earn. You want a low ratio, around 0.3 or lower. If you have thousands of dollars of debt in student loans or wrapped up in a car, it brings your ratio up. If you have a large amount of earned, steady income, then it will bring your ratio down. Pay off some of your high interest-earning debts to decrease your ratio!
Predictions for the 2021 Housing Market
We are two months in to this new year and exciting things are in store for the housing market.
In 2020, the housing market was a bright spot among all of the economic issues. The Senate introduced the CARES Act (Coronovirus Aid, Relief, and Economic Security Act) which included many changes to financial policies in order to minimize the economic effect of the pandemic.
An important piece of that legislation centered on mortgages. Under the CARES Act, homeowners with government-backed mortgages (including USDA loans, VA loans, etc) can pause their mortgage payments for up to 12 months with no penalties.
This process is known as forbearance. This is not loan forgiveness, but it is pushing payments to a future date. Millions of Americans were able to keep their homes because of this legislation, and it helped avoid a market crash.
This month (February 2021) is the expiration of this Act. Housing market analysts predict that there will be an increase in foreclosures in the near future, from those who could not pay on their forbearance plans.
How does this affect the 2021 housing market?
Realtor.com announced that 2021 started with the lowest amount of homes for sale ever. This may indicate that this will not be a good season for buyers, but an amazing time for sellers!
Some experts have predicted that the increase in the number of foreclosures will increase the volume of homes in the market this year. Sadly, this is at the expense of those homebuyers who can no longer afford their mortgages. On the bright side, due to the increase in home values, they may be able to sell their house for a higher price rather than foreclosure.
Should this prediction come true, it may shift the market from a seller’s market to a buyer’s market.
Mortgage rates hit record lows in 2020, driving demand up along with home prices. With this combination of record-low interest rates and possibly affordable home prices, the next six months will be a good time to buy!
The mortgage interest rates are almost guaranteed to increase in the near future because they are currently at a record low, but according to Time.com, experts have predicted that they will remain lower than the 2019 rates.
Congratulations on getting ready to purchase a new home or refinance your home! Enjoy this exciting time and please drop your finance questions in the comments. Madison would love to answer any questions!
I’m a senior studying Personal Financial Planning. I worked as a Junior Advisor at Northwestern Mutual and learned that there is much more to learn in the ever-changing world of personal finance.